Understanding the Cramdown in Chapter 13 Bankruptcy
Most people are aware that bankruptcy is a nuanced process where the debtor has an array of choices and decisions that he or she must make. While this decision includes whether to file for bankruptcy and the type of bankruptcy that is most likely to eliminate debt, there are additional considerations to make. One of these is if any unique aspects of the form of bankruptcy (s)he selects can be utilized in his or her bankruptcy filing.
The “cramdown” is a legal power in bankruptcy exclusive to Chapter 13. The cramdown can only apply if you file a Chapter 13 case and you are subject to certain situations with secured loans. The attorneys of The Bankruptcy Group can assess your financial situation and determine whether utilizing a cramdown can benefit your filing and financial position.
What Is a Cramdown?
A cramdown refers to a procedure whereby a secured creditor is forced to accept repayment of a debt based upon the fair market value of the security, rather than the amount that is owed on the debt. Stated differently, the creditor is forced to accept an amount less than what is contractually owed up to the current fair market value of the security. A secured creditor is a creditor whose loans are guaranteed or backed up by property that you pledged.
Thus, in practical terms, if a debtor owns a vehicle that is worth less than what is contractually owed, the debtor can restructure the debt and the monthly payments to reflect the fair market value of the vehicle. For example, if the debtor owns a vehicle that is worth $10,000 and is paying $300 per month with 36 remaining payments at 8% apr, the normal debt service would mean that the debtor would be paying additional money due to the financing for a car that is worth $10,000. Through a cramdown procedure, known as a “Motion the Value,” the debtor can restructure the debt by offering to pay through the Chapter 13 plan a certain amount per month over a period of months reflecting a reduced interest rate.
The effect of the cramdown in the above hypothetical means that the debtor will be saving money over the course of the Chapter 13 repayment plan. The exact amount of savings is dependent upon an array of factors including the debt owed, the individual’s financial standing, and the judge the Chapter 13 case is pending before.
How Is Property Valued for Purposes of a Cramdown?
In many cases there will be some dispute regarding the value of the property. If there is a factual issue over the current fair market value of the secured property or the amount of interest to be charged, the creditor may oppose the motion to value. Ultimately, the judge will decide the current fair market value of the property and the acceptable interest rate to be charged. Therefore, it is essential to work with legal counsel who understands the type of evidence a bankruptcy judge finds persuasive in regards to a property valuation. We can fight to assure that the court values the property fairly and in a manner that is beneficial to your ultimate goals. A court that improperly overvalues the value of secured property can undercut the relief that it is supposed to provide.
Why Should You Work with a Sacramento Bankruptcy Attorney?
To summarize, the cramdown is a remedy available to debtors in a Chapter 13 case. The cramdown remedy is not usually the reason why a debtor files for bankruptcy; however, it is a remedy that can save the debtor many thousands of dollars over the course of the plan, and can make a difference in plan confirmation for a debtor’s tight monthly budget. It can also work in favor of plan confirmation when the feasibility of the plan is questioned.
However, the cramdown and the entire bankruptcy plan is a complicated and detail-oriented legal document. If you are going to file for bankruptcy, it is essential that all obligations and debts are included and other legal requirements are followed. The attorneys of The Bankruptcy Group can provide strategic and meticulous guidance each step of the way. We can look for advantages that can be gained through cramdown and other aspects of bankruptcy. To schedule a free and confidential bankruptcy consultation in Roseville or Folsom call us at 1-800-920-5351 or contact us online today.